Gold Prospecting and Mining

Scrap Gold Business Model

Have you wanted to work a job that does not require you to come in at certain hours just to allow you to keep it? Would you rather make more money doing something that is more interesting than spending a lot of time in a cubicle? This is the solution for you: become an expert in scrap gold! Gold is historically one of the most stable investments, so your market is not going under any time soon! You will learn how to start dealing in scrap gold and how to start your business for less than $50! You will also learn how to test the gold that you come across so that you don't get ripped off. You will learn how to trade peoples gold for cash, and how to find gold in the first place. Start making your own business that deals in the most secure investment of all time! Continue reading...

Scrap Gold Business Model Summary

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The Secret Path to the Gold Mine

As a house detective, you must possess the ability to spot hidden profit potential. That means you must have special knowledge and the skills to increase the property's income, or value, that other competing buyers don't have. These special sleuthing skills can be developed only through experience. Obviously, new investors will need to own and operate several properties in order to get that kind of experience. Generally, novice investors without much real estate experience will not be able to recognize a property's gold mine potential, even if they get close enough to fall down the shaft. Education and experience will take some time. Completing several actual deals will provide the necessary experience. I do not know of any shortcuts to develop these skills.

Dont Walk Away from Your Gold Mine

I'm aware that most new investors tend to follow the same path I did. First, they learn how to acquire income-producing real estate, and, of course, that's a good start. However, most of them don't follow through and expand their moneymaking opportunities. Many small-time investors miss out on real profits, similar to inexperienced gold miners who, after easily finding shiny nuggets on the surface, leave the real fortune hidden by only a few inches of sand. Brain compounding happens when you continue to seek more knowledge. It will make your investment houses produce far greater yields than you can ever imagine.

Cold Versus Gold Mining Shares

A dramatic example of the last point was shown in the fourth quarter of 1989 and the first month of 1990 as gold mining shares became the top performing stock group at a time when the stock market was just beginning to experience serious deterioration. There is a strong positive link between the trend of gold and that of gold mining shares. A technical analysis of one without the other is unwise and unnecessary. The accompanying charts show why. for clues. Nowhere is that more evident than in the relationship between the price of gold itself and gold mining shares. As a rule, they both trend in the same direction. When they begin to diverge from one another, an early warning is being given that the trend may be changing. Usually one will lead the other at important turning points. Knowing what is happening in the leader provides valuable information for the laggard. Many people assume that commodity prices, being the more sensitive and the more volatile of the two, lead the related...

Special Report Gold

But are we after the gold rush already It is a legitimate question to ask whether we are facing an imminent trend reversal or if the recent correction was nothing but a little breather ahead of the next massive upward swing. What could be a potential catalyst to the continuation of the gold rush What are the risks In the third edition of our annual special report on gold we would like to discuss why we believe that the gold sector still offers a shiny outlook for existing and potential investors.

Contingent Claim Valuation

An asset can be valued as a call option if the payoffs on it are a function of the value of an underlying asset if that value exceeds a pre-specified level, the asset is worth the difference if not, it is worth nothing. It can be valued as a put option if it gains value as the value of the underlying asset drops below a pre- specified level, and if it is worth nothing when the underlying asset's value exceeds that specified level. There are many assets that generally are not viewed as options but still share several option characteristics. A patent can be analyzed as a call option on a product, with the investment outlay needed to get the project going considered the strike price and the patent life becoming the life of the option. An undeveloped oil reserve or gold mine provides its owner with a call option to develop the reserve or mine, if oil or gold prices increase.

Be At The Right Place At The Right Time

Just about every person has made this comment at one time or other Boy, that person sure was lucky to be at the right place at the right time. Timing is very important to just about every decision you can make, and when it comes to investment decisions, timing is generally the most important aspect of the entire process. However, for timing to work there must be recognition of opportunity. Unless you see a way to reach for your goals, the right time just never seems to come around. As for being at the right place, that is up to you. Your gold mine is likely to be found wherever you want to look for it that is, if you truly want to take the time and effort to learn everything you can about the kind of property you want to buy in that chosen location.

The diverging pattern

The diverging indicator pattern should warn those who want to go bullish to stay out of a stock. However, for those who wish to sell stocks short or purchase put options, the diverging pattern provides a visual gold mine. But expect a price shift when the indicators stop moving apart and begin to move toward each other (as they did in April and May).

Reits Versus Other Real Estate Investment Vehicles

As an asset class, real estate has normally been a very good investment. A well-situated, well-maintained investment property may grow in value over the years, and its rental revenues may grow with it. While buildings may depreciate over time and neighborhoods change, only a finite amount of land exists upon which an apartment, store, or building can be built. If you own such a property in the right area, it can be, if not a gold mine, a cash cow whose value is likely to increase over the years. New, competitive buildings will not be built unless either rents or property values are high enough to justify the development costs. In either such event, owners of existing properties will be wealthier.

Stable Earnings Better Investment

Even as he bought the stocks, he found that many of them were pricey, trading at high multiples of earnings, suggesting that other investors had come to the same conclusion as Larry about the low risk and high quality of these stocks. Having bought the stocks, he also noticed was that stock prices were volatile at some of these companies, even though their earnings were stable. One of the stocks in Larry's portfolio was a gold mining stock and when gold prices jumped because of a crisis in the Middle East, Larry noticed that the company did not report higher earnings, even though other gold mining companies did. When he confronted management about this, they admitted they used gold futures contracts to hedge risk. While these contracts reduced their exposure to downside risk, it also reduced their upside profits. When Larry assessed the end results of his portfolio, he found that he had still been exposed to risk and had relatively little to show for it. Larry's search for a free...

Complex Formulas Are Not Necessary

After many years of doing this work, I'm convinced that simple formulas are the best. But, before I tell you how and why this is true, I must warn you to be very skeptical of high-tech computer programs that tend to bowl you over with tons of elaborate financial computations. Hyped-up input data that shows rent increases year after year can make any property look like a gold mine. However, any experienced landlord or landlady will tell you that rents don't always go up and neither do values

Depreciation of selected currencies vs gold end of March 1934 as compared to gold parities 1929

Gold shares, on the other hand, were going from strength to strength. The development of the most important gold producer, Homestake Mining, can serve as reasonably approximate series for comparison. From 1929 to end-1935, the share price increased from USD 75 to above USD 500, and dividends totalled USD 130. However, the strongest increase only happened after the period of deflation (1929-1932) and as the sudden onset of inflation (1932-1935). We would envisage a similar scenario for the future. The stability of the gold shares during the general crash on the equity markets was probably due to the fact that the gold price was fixed and the revenues of the producers were therefore stable, whereas all other commodity prices collapsed. Other gold mining shares outperformed the market at impressive degrees as well. Dome increased from 1929 to 1936 by almost 1,100 , and Battlemountain shares soared by 1,200 . That said, the performance came also on the back of substantially increased...

The Fundamental Essence Of Real Options

The use of traditional discounted cash flow alone is inappropriate in valuing certain strategic projects involving managerial flexibility. Two finance professors, Michael Brennan and Eduardo Schwartz, provided an example on valuing the rights to a gold mine. In their example, a mining company owns the rights to a local gold mine. The rights provide the firm the option, and not the legal obligation, to mine the gold reserves supposedly abundant in said mine. Therefore, if the price of gold in the market is high, the firm might wish to start mining and, in contrast, stop and wait for a later time to begin mining should the price of gold drop significantly in the market. Suppose we set the cost of mining as X and the payoff on the mined gold as S, taking into consideration the time value of money. We then have the following payoff schedule As an extension of the gold mine scenario, say we have a proprietary technology in development or a patent that currently and in the near future...

Dealing with the Local Lenders Savings and Commercial Banks

The overly aggressive lending posture by many mortgage brokers and loan companies was fueled by some of the lowest interest rates in the past 40 years of conventional financing. This, coupled with a booming real estate market, partially encouraged by those low interest rates and a sluggish stock market, was a new gold rush into real estate as the way to make a quick million or two. Real estate investors could do no wrong, the buyers flocked to anything they could buy, and the cheap money was there for the taking.

Step 3 Build the brokers or sellers motivation level for selling

It is part of human nature that someone who has owned a commercial property for a period of time is probably going to have an inflated idea of the type of offers they may be getting. After all, one of the nice things about owning a property that gives you a passive stream of cash flow is daydreaming about exactly how much your little gold mine is going to be worth some day. So, make sure that you use this step to bring the seller's motivation into the equation.

Random Walks And The Efficient Market Hypothesis

Suppose Kendall had discovered that stock prices are predictable. Imagine the gold mine for investors If they could use Kendall's equations to predict stock prices, investors would reap unending profits simply by purchasing stocks the computer model implied were about to increase in price and selling those stocks about to fall in price.

Gold And The Stock Market

Usually when the conversation involves the relative merits of investing in commodities (tangible assets) versus stocks (financial assets), the focus turns to the gold market. The gold market plays a key role in the entire intermarket story. Gold is viewed as a safe haven during times of political and financial upheavals. As a result, stock market investors will flee to the gold market, or gold mining shares, when the stock market is in trouble. Certainly, gold will do especially well relative to stocks during times of high inflation (the 1970s for example), but will underperform stocks in times of declining inflation (most of the 1980s).

Golda Key To Vital Intermarket Links

It's important to recognize the role of gold as a leading indicator of inflation. Usually in the early stages of a bull market in gold, you'll read in the papers that there isn't enough inflation to justify the bull market since gold needs an inflationary environment in which to thrive. Conversely, when gold peaks out (in 1980 for example), you'll read that gold should not drop because of the rising inflation trend. Don't be misled by that backward thinking. Gold doesn't react to inflation it anticipates inflation. That's why gold peaked in January of 1980 at a time of double-digit inflation and correctly anticipated the coming disinflation. That's also why gold bottomed in 1985, a year before the disinflation trend of the early 1980s had run its course. The next time gold starts to rally sharply and the economists say that there are no signs of inflation on the horizon, begin nibbling at some inflation hedges anyway. And the next time the stock market starts to look toppy, especially...

The Almighty And Not So Mighty Dollar

The dollar became the unofficial global wealth standard during the Great Depression. Most of the nations in the rest of the industrial world were indebted to the United States in dollars, and America was by far the richest nation in the world. When President Roosevelt revalued gold from 20.67 to 35 an ounce, the United States sucked in gold from all over the world, as bullion holders and gold miners eagerly swapped their metal for dollars.

The Worlds Greatest Investor

Now in his 62nd year, wealthy beyond imagination, he knew that he had won the contest, that he would not die poor. Indeed, he might well die one of the richest men in America. Yet no one dared suggest that it was time to take the sign down. The others in the office needed an incentive, after all. Some were wealthy in their own right, worth millions of dollars. They wouldn't die poor either. Indeed, it was as if those who toiled alongside George Soros had all taken part in the gold rush, and all had struck gold. The Soros Fund Management office did not look like Fort Knox, nor was it as difficult to penetrate. It did, however, have the same intoxicating smell of money.

Stock Groups And Related Commodities

This discussion of the intermarket group analysis touches on two important areas. First, I'll show how stock groups are affected by their related commodity markets, and vice versa. Sometimes the stock group in question will lead the commodity market, and sometimes the commodity will lead the stock group. A thorough technical analysis of either market should include a study of the other. Gold mining shares usually lead the price of gold. Gold traders, therefore, should keep an eye on what gold raining shares are doing for early warnings as to the direction the gold market might be taking. Stock traders who are considering the purchase or sale of gold mining shares should also monitor the price of gold.

The Crb Index Versus Bonds

What tends to happen at market tops is that the bond market will start to drop. The bearish influence of falling bond prices (and rising interest rates) pulls interestsensitive stocks downward. Eventually, the stock market will also begin to weaken. This downturn in the stock averages will often be accompanied by an upturn in certain tangible asset stock groups, such as energy and gold mining shares.

Closer Look At Cold Versus Gold Stocks From 1987 Through The End Of 1989 Gold Shares Showed A Major Bullish Divergence

THE UPPER CHART SHOWS THE BASING ACTIVITY AND BULLISH BREAKOUT IN THE S& P GOLD MINING INDEX. THE BOTTOM CHART IS A RATIO OF GOLD STOCKS DIVIDED BY THE S& P 500 STOCK INDEX AND SHOWS GOLD OUTPERFORMING THE MARKET FROM THE SUMMER OF 1989. COLD SHARES REALLY BEGAN TO GLITTER IN NOVEMBER.

Why Gold Stocks Outshine Gold

During 1987 gold rose only 40 percent while gold shares gained 200 percent. From the fall of 1989 to January 1990, gold shares rose 50 percent while gold gained only about 16 percent. The explanation lies in the fact that gold shares offer leverage arising from the fact that mining profits rise more sharply than the price of the gold itself. If it costs a company 200 an ounce to mine gold and gold is trading at 350, the company will reap a profit of 150. If gold rises to 400, it will appreciate in value by only 15 percent ( 50 350), whereas the company's profits will appreciate by 33 percent ( 50 150). Figure 9.7 shows some gold mining shares benefiting from the leveraged affect of rising gold prices.

Interestsensitive Stocks

On January 31, 1990, Investor's Daily ranked its 197 industry groups for the prior six months. The six best-performing groups were all commodity related Gold Mining (1), Food Sugar Refining (2), Silver Mining (3), Oil & Gas Field Services (4), Oil & Gas Offshore Drilling (5), Oil & Gas International Integrated (6). Four other oil groups ranked in the top 20 on the basis of relative strength. In sharp contrast, bank

Mine production 1998 2010e

Production is gradually shifting to the emerging markets. While China, Peru, Russia, and Indonesia accounted for 19 of world production ten years ago, their share in global output has in the meantime risen to 34 . The massive decline in production of the largest mining nations was offset mainly by smaller, sometimes politically unstable countries with bad infrastructure. There are more than 90 countries with at least one producing gold mine. Given that China and Russia are net importers, in other words given that the largest (China) and the sixth-largest producer hoard their own gold production domestically, they do not contribute a single ounce of gold to the global gold markets.

Advantage of Using This Technique

He has cut you short on the time, so your actual cost now, if you chose to pay it, is a greater interest than you wanted to pay. However, there are some advantages to you. You have four years to hope and pray that the road is completed (or has it even started yet ), and if something pops sooner, you can simply pay this lender off and cash in on the gold mine you know is going to come in.

Natural Resource Options

In a natural resource investment, the underlying asset is the natural resource and the value of the asset is based upon the estimated quantity and the price of the resource. Thus, in a gold mine, the underlying asset is the value of the estimated gold reserves in the mine, based upon the price of gold. In most such investments, there is an initial cost associated with developing the resource the difference between the value of the estimated reserves and the cost of the development is the profit to the owner of the resource (see Figure 12.3). Defining the cost of development as X and the estimated value of the resource as V makes the potential payoffs on a natural resource option the following oil leases, for instance, the oil tracts are leased to the oil company for a fixed period. The second approach is based upon the inventory of the resource and the capacity output rate, as well as estimates of the number of years it would take to exhaust the inventory. Thus, a gold mine with a...

A Hostile Acquisitions

The control premium should vary depending upon why a firm is performing badly The control premium should be higher when a firm is performing badly because of poor management decisions than when a firm's problems are caused by external factors over which management has limited or no control. Thus, the value of control will not be as high in a gold mining company whose earnings are depressed because gold prices have dropped as it would be at a manufacturing company where earnings are low because of management misjudgments about what customers want.

Fibonacci Projection Levels

As you can see from the USD JPY chart, the price did move right down to the 161.8 percent projection level before catching some support. And while it may seem that we got lucky on this one and that it sure is a coincidence that support showed up right at the level we identified, we can assure you this is another classic example of a self-fulfilling prophesy. Remember, large institutional traders are closely watching these Fibonacci levels, and they know that everyone else in the market is watching them as well. And in an effort not to be left out of any trade, everyone is poised to move together once someone flinches. This herd mentality can be a gold mine for individual investors.

Golds Multifaceted Shine

The supply side of gold has also contributed to the run-up in prices. Global mine production fell 6 percent between 2002 and 2008, mainly due to power shortages and miners' stoppages demanding better safety rights in South Africa. The world's top gold producer has seen output plummet to 70-year lows. Meanwhile, the top gold mining companies have also gradually reduced their hedge books designed to cover them against falling prices. As the upward price trend accelerated markedly between 2005 and

Expansion Into East Germany

On November 9, 1989, the Berlin Wall fell. A German privatization agency, Treuhand Anstalt, (literally translated, Trust Agency), was set up to arrange for the sale of thousands of East German companies. This created a unique opportunity for many West German firms. They felt that they could extend the use of their technological and marketing expertise, while the East German companies could contribute their knowledge about eastern markets. Some East German companies were snapped up by western firms with near gold-rush ferocity (in the words of the Financial Times of London). A large Swedish-Swiss electrical engineering group, for example, was one of the acquirers of East German firms.

Dont Throw the Gold Away with the Sand

Well, I must tell you that having clean and manageable transactions should never mean tossing your money or profit potential out the window If it does, you're in for big trouble as an investor Never lose sight of the target or you'll be passing right over some hefty profits that could easily be yours for the asking. It's much like having big gold nuggets in your pan, then throwing them out with the sand because you fail to recognize them

Leveling And Adjustable Rate Loans

We term the technique that we use leveling for a reason that will become clear, It applies to situations where cash flow is defined by two variables, say, j and .v. The first of these is a discrete variable that by itself would define a lattice The second variable is a continuous variable that is also needed to define cash flow. As an example, consider the Complexico gold mine with random gold prices (which was treated in Chapter 12, Example 1.2.8). The gold price can be modeled as a binomial lattice, so this price serves as the lattice variable j. However, after arriving at a lattice node, the cash flow there depends also on the amount of gold remaining in the mine, and hence this amount serves as the a variable. The mine value is path dependent because the amount x at any gold price node depends on the path that led to that node Problems of this type look discouraging because we fear1 that we might need a lot more nodes to account for the v dependence The method is called leveling...

Be Creative Split Fund Plant Transaction Remember the split

A landscape deal requires a bit more finesse, since you might have a gold mine under your nose and not recognize it. Landscapers will pay a lot of money for the right kind of plants. If many 1 arge style developments are going on in your area, such as clubhouses, banks, shopping plazas, airports, hospitals, and so on, mature plants will be in demand.

This Is Not a Recommendation

On that Thursday, in the summer of 1996, I was on my way to the Andes Mountains to inspect a gold mine that was once mined by the Incas and then the Spaniards. I was taking a bold step of faith into a world I knew nothing about. Yet, because of that step, a whole new world of investing opened to me. My life has not been the same since I decided to take that step. My reality on what is possible financially has not been the same. My reality on how rich a person can become has expanded. The more I continue working with Peter and his team, the further those limits to wealth expand.

Currency Plays in Gold and Copper

Soiilh African Rand Although South Africa remains the world's largest gold producer, the once-robust relationship between the South African rand and gold has largely dwindled as a result of South Africa's plummeting gold production. Power shortages, labor unrest, and violence-related disruptions have led to a 73 percent decline in gold production from 1970 to 2007. Gold exports as a percentage of the total fell 50 percent since the 1980s. As a result, the rand fell 10 percent in 2007 despite gold's 100 percent increase over the year. Chronic energy shortages have also forced mines into rationing until new power is brought on line in 2012, thereby depriving miners from exploiting soaring gold prices. This is the opposite case from Australia, whose developed mining companies have the capacity to step up copper production and sell the high-priced metal in the export market. Figure 8.22 charts the remarkable contrast between the South African rand and the rest of the four metal-dependent...

You Dont Always Hit Homeruns

I suspect that many of today's high-flying Internet IPOs will come crashing down in the next few years and investors will lose millions, if not billions, of dollars. Although the Internet does provide a tremendous new frontier, the forces of economics allow only a few of the pioneering companies to be winners. So regardless of if the company going public is a gold-mining company, a plumbing-supply company, or an Internet company, the forces of the public market still have much of the control.

Prototype Examples Valuing an RD Program and a Mine Concession

In this section we present two extended prototypical real-options valuation applications. In the first example, we consider the value of investing in R& D and subsequent stages of commercialization. This multistage R& D investment decision can be viewed as a compound option (or option on an option). The second example considers the valuation of a gold mine license, where the current project value can be benchmarked and estimated using a traded financial instrument (gold futures) whose probabilistic behavior is close to that of the producing mine. The valuation of a license to develop the mine is treated analogously to the valuation of a (simple) call option.

Commoditylinked currency

Historically, the Australian dollar has had a very strong correlation (approximately 80 percent) with commodity prices and, more specifically, with gold prices. The correlation stems from the fact that Australia is the world's third largest gold producer, and gold represents approximately 5 billion in exports for the nation each year. As a result, the Australian dollar benefits when commodity prices increase. Of course, it also decreases when commodity prices decline. If commodity prices are strong, inflationary fears start to appear and the RBA would be inclined to increase rates to curb inflation. However, this is a sensitive topic, as gold prices tend to increase in times of global economic or political uncertainty. If the RBA increases rates during those conditions, it leaves Australia more vulnerable to spillover effects.

Investments With Private Uncertainty

Suppose a project requires an initial cash outlay and wili produce an uncertain cash flow at the end of one year Suppose also that the uncertainty consists of both private uncertainty and market uncertainty Basically, market uncertainty can be replicated with market participation, whereas private uncertainty cannot. For example, the cash flow of a gold mine lease depends both on the market uncertainty of gold prices and on the private uncertainty of how much gold is in the yet unexplored veins

Understand the Comfort Zone Strategies and Goals

Your overall strategy is to learn the important elements of a comfort zone as quickly and as effectively as possible. In this book, I have touched on most of the steps that are not also contained in this chapter. Your success in achieving the desired success in the implementation of an effective comfort zone will be up to you all I can do is give you the right map to that success. That success, by the way, will occur like a bright floodlight being turned on. You will suddenly see what it is that makes your backyard your investment gold mine, and investment opportunities will begin to pop out at you when in the past (say a few weeks earlier), you would have not given them a second look.

Selling for What You Paidand Still Making a Profit

Even with high-leverage deals like this, it's quite easy to structure the seller financing (quite often interest only) in a way that will allow the owner to enjoy a very respectable cash flow, starting with the first day of ownership. It's also very common, with these types of rental units, to earn handsome profits, even if the property doesn't appreciate at all. That's because the property is a cash flow machine. You've actually acquired a gold mine every month you'll be able to mine out fresh green cash. Here's an important thing to remember. When you're lucky enough to locate income properties that have a rent-to-value factor of 1.5 or above, it's like the gold miners say You're beginning to see some very good colors. Stick with the deal and figure it out. There's a very good chance you're standing real close to a cash flow spigot.

Map of the City in Which You Will Build Your Initial

The neighborhood and see many small, older homes. Yet, when you look at the zoning map, you see several different zoning actually exists under those small older homes. Many older neighborhoods are developed on land that has a higher (economic) value due to its prescribed zoning. If the zoning allows professional use or multifamily uses and yet all that is there are single-family homes, you may have stumbled into a virtue gold mine. If, however, you see multifamily and business uses and the actual (current as it may have changed over the years) zoning does not allow those uses, you must be very careful. Those uses may be grandfathered and will be what is called nonconforming uses. What this means is that as long as nothing happens to require the owner to conform to the actual zoning, then the use can stay. Okay, that's true, but what can trigger the owner to be forced to convert the use to its actual zoning uses Many things, and they may differ between local ordinances. In general,...

Analyzing Stocks within a Strong Sector

The same strength analysis that was performed for the sectors will be done for the stocks in those sectors. In the gold and silver sector, I have picked 10 stocks to conduct the comparison analysis (which is the same as what we performed for the sectors). The stocks are Freeport McMoran (FCX), Aqnico Eagle Mines (AEM), Meridian Gold (MDG), Goldcorp. (GG), Barrick Gold Corporation (ABX), Silver Standard Resources (SSRI), Pan American Silver (PAAS), Newmont Mining (NEM), Kinross Gold Corporation (KGC), and Harmony Gold Mining (HMY).

Evaluating Real Investment Opportunities

Options theory can be used to evaluate investment opportunities that are not pure financial instruments. We shall illustrate this by again considering our gold mine lease problems Now, however, the pr ice of gold is assumed to fluctuate randomly, and this fluctuation must be accounted for in our evaluation of the lease prospect. Example 12.7 (Simplico gold mine) Recall the Simplico gold mine from Chapter 2 Gold can be extracted from this mine at a rate of up to 10,000 ounces per year at a cost of 200 per ounce Currently the market price of gold is 400 per ounce, but we recognize that the price of gold fluctuates randomly. The term structure of interest rates is assumed to be flat at 10 As a convention, we assume that the price obtained for gold mined in a given year is the price that held at the beginning of the year but all cash flows occur at the end of the year. We wish to determine the value of a 10-year lease of this mine How do we solve the problem of finding the lease value by...

Introduction to portfolio construction

In the literature about trading systems there are really few ideas on how to compose a portfolio that is, which markets to trade and which systems to apply to which markets. Usually in our business, where there is a lack of information about a specific topic it means that some gold nuggets are hidden somewhere. Portfolio composition is one such area that for years has not been able to overcome some useless ideas such as the Wilder's Commodity Selection Index or other more sophisticated approaches full of estimates, the origins of which nobody knows.

By David Harper

The aim of this tutorial is to answer these questions by providing a succinct yet advanced overview of financial statements analysis. If you already have a grasp of the definition of the balance sheet and the structure of an income statement, great. This tutorial will give you a deeper understanding of how to analyze these reports and how to identify the red flags and gold nuggets of a company. In other words, it will teach you the important factors that make or break an investment decision.

Net Flows

Here we use a relatively simple example involving a gold mine to illustrate net present value analysis. Various gold mine examples are used throughout the book to illustrate how, as we extend our conceptual understanding, we can develop deeper analyses of the same kind of investment . The Simplico gold mine is the simplest of the series Example 2.6 (Simplico gold mine) The Simplico gold mine has a great deal of remaining gold deposits, and you are part of a team that is considering leasing the mine from its owners for a period of 10 years. Gold can be extracted from this mine at a rate of up to 10,000 ounces per year at a cost of 200 per ounce This cost is the total operating cost of mining and refining, exclusive of the cost of the lease Currently the market price of gold is 400 per ounce. The interest rate is 10 . Assuming that the price of gold, the operating cost, and the interest rate remain constant over the 10-year period, what is the present value of the lease

Family Values

One day, while taking inventory, John stumbled upon several stock certificates, which had evidently been stored immediately following the Depression some 15 years earlier. The 15-year-old's eyes saw a gold mine, hoping it was enough to save his family from hardships for the rest of their lives. After some investigation and not wanting to share the secret until he knew the value John realized that the certificates were worthless. But what he did come away with was a fascination for the financial markets. As his father had found business freedom when he came to the States, John realized the power of the free markets and the ability of individuals to collectively take ownership and collectively prosper. Growing up, I decided that I would spend my life doing interesting things, John remembers. One of those things was investing.

Figure 825

Many stocks groups are tied to specific commodity markets and tend to rise and fall with that commodity. Two obvious examples that will be examined in this chapter are the gold mining and energy stocks. Other examples would include copper, aluminum, and silver mining shares. These commodity stocks tend to benefit when commodity prices are rising and inflation pressures are building. On the other side of the coin are interest-sensitive stocks that are hurt when inflation and interest rates are rising. Bank stocks are an example of a group of stocks that benefit from declining interest rates and that are hurt when interest rates are rising. In this chapter, the focus will be on savings and loan stocks and money center banks. Other examples include regional banks, financial services, insurance, real estate, and securities brokerage stocks.

Figure

A COMPARISON OF GOLD AND GOLD MINING SHARES FROM 1985 INTO EARLY 1990. BOTH MEASURES USUALLY TREND IN THE SAME DIRECTION. GOLD LED GOLD SHARES HIGHER IN 1986. HOWEVER, GOLD SHARES TURNED DOWN FIRST IN THE FALL OF 1987 AND TURNED UP FIRST IN THE FALL OF 1989. the middle of 1985 into January of 1990. There are three points of particular interest on the chart. Going into the summer of 1986, gold was going through a basing process (after hitting a low in the spring of 1985). Gold shares, however, where drifting to new lows. In July of 1986, gold prices turned sharply higher (influenced by a rising oil market and bottom in the CRB Index). That bullish breakout in gold marked the beginning of a bull market in gold mining shares. In this case, the price of gold clearly led the gold mining shares. As 1989 unfolded, it was becoming evident that an important bullish divergence was developing between gold and gold shares. As gold continued to trend lower, geld shares appeared to be forming an...

Mth Ma

The study of gold and oil leads us to the next stop on the intermarket journey, and that is the study of industry groups. Two global themes that were seen as the 1980s ended were strength in asset-backed stocks, such as gold mining and energy shares, which benefit from rises in those commodities, and weakness in interest-sensitive stocks, which are hurt when bond prices fall (and interest rates rise). The relevance of intermarket analysis for stock groups will be examined in the next chapter.

The Broader Markets

The markets I follow are the S& P 500 Large Cap Index (SPX), NYSE Composite Index (NYA), and Nasdaq Composite Index (COMPQ). I also follow gold issues, which I have been bullish on since early 2002. The indexes I monitor for gold issues are the S& P TSX Capped Gold Index (SPTGD) and Market Vectors Gold Miners (GDX). I do watch the Gold and Silver Index (XAU) and Gold Bugs (HUI), but volume on these two indexes is not readily available, whereas volume plays an important role in my analysis of SPTGD and GDX.

Energy

Gold analysts such as Bill Murphy, Doug Casey, Jay Taylor, James Sinclair, and many others easily see the gold price hitting four figures in the not-too-distant future. In that case, gold mining stocks would perform fantastically well (not unlike their heyday in the late 1970s). For conservative investors, consider the large, established mining firms such as Newmont Mining (NEM) or Gold Corp. (GG). For the more daring, consider junior mining stocks. Do your research with the Web sites mentioned in this segment.

Conclusion

We envisage substantially lower operating costs and therefore rising margins for the gold mining companies in 2009, and we expect them to clearly outperform the gold price. The best performance should be coming from those companies that have presented positive feasibility studies with prices based on peak costs of around mid-2008. M& A activities have recently picked up again. Due to the massive capital increases of the senior and mid-tier producers we expect the sector consolidation to be prolonged.

Leasehold Financing

Ronnie's acquisition of the property had turned into a gold mine for him as well. His 74,000-a-year lease payment had the negative value of not more than 740,000. This is a value easy to estimate as the present day value of which 74,000 would pay off in 40 years, the 40 years factor being a period of time longer than any leasehold loan which Ronnie might obtain. At the present lending rates, a constant rate of 10 percent would be very conservative in this approach. Because the present value of the land by itself would be 5 million, Ronnie's leasehold value could then be seen at that value less the negative value of the lease. Therefore,

Supply

Gold inventories are the highest they've been in the history of the world. Unlike most other commodities that get used up, gold is virtually indestructible. All the gold that has ever been mined is still out there in one form or another. Gold Fields Mineral Services has estimated that at the end of 2003 the aboveground stocks totaled Gold, in fact, is mined on every continent, except Antarctica, where an international moratorium on mining has been in effect for decades the original Antarctic Treaty was reinforced by the Madrid Protocol of 1991 designating Antarctica a natural reserve devoted to peace and science. According to the research for the 2004 CRB Commodity Yearbook, production from the world's mines fell by 1.9 percent in 2002, to 2.550 million kilograms (from 2.600 million in 2001). The world's champion gold producer was South Africa (16 percent of world production) the U.S. (12 percent) was second, followed by Australia (11 percent), China (7.5 percent), Russia (6.2...

Ratio analysis

The relation of an average single-family home and gold confirms the purchase power preservation impressively. Currently 230 ounces of gold would buy a single-family home the 40-year median is 341 ounces. This means that property is currently cheap in relation to gold. At the end of the last gold rush, that number was down to 100. We regard such a development as realistic.

Predicting Betas

Rosenberg and Guy also found that even after controlling for a firm's financial characteristics, industry group helps to predict beta. For example, they found that the beta values of gold mining companies are on average .827 lower than would be predicted based on financial characteristics alone. This should not be surprising the -.827 adjustment factor for the gold industry reflects the fact that gold values are inversely related to market returns.

Back To The Future

The financial markets are not random and there are ways to take advantage of this nonrandomness with the help of mechanical trading strategies. The good news is that you do not have to be a rocket scientist to do so. You only need a tad more knowledge than you hold about the topic already. Unfortunately, knowing too little about a specific topic sometimes can be more devastating than knowing nothing at all. The big fish in this industry realize that, so they have no incentive to educate you, because what is devastating for your economy is a gold mine to theirs.

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